Moody’s Investors Service has revised the outlook for the Indian banking system from âstableâ to ânegativeâ due to stabilizing asset quality and improving capital mobilization.
The global credit rating agency, in its Banking System Outlook for India, observed that the deterioration in asset quality since the start of the coronavirus pandemic has been moderate and that the environment has improved. operational will support the quality of assets.
Moody’s raises outlook for India’s rating from “negative” to “stable”
Lower credit costs resulting from improved asset quality will lead to improved profitability. The agency estimated that the capital would remain above pre-pandemic levels.
Moody’s expects India’s economy to continue to recover over the next 12-18 months, with GDP growth of 9.3% in the fiscal year ending March 2022 and 7.9% % the next year.
The agency estimated that the recovery in economic activity will boost credit growth, which it expects to be 10 to 13 percent per year. The weak financial position of companies and the funding constraints of finance companies were key negative factors for banks, but these risks have diminished.
The quality of assets will be stable
According to Moody’s, the deterioration in asset quality since the start of the pandemic has been more moderate than expected despite relatively limited regulatory support for borrowers.
The agency noted that the quality of business loans has improved, indicating that banks have recognized and provisioned all legacy problem loans from this segment.
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âThe quality of personal loans has deteriorated, but to a limited extent as there have been no large-scale job losses. We expect asset quality to improve further, leading to lower costs of credit, as economic activity normalizes, âMoody’s said.
Capital ratios have risen at all of the rated banks over the past year as most have issued new shares, the agency said.
Moody’s said the ability of public sector banks to raise equity in the market is particularly favorable for credit because it reduces their dependence on government for capital.
However, further capital increases will be limited as banks will use most of the retained earnings to support accelerating loan growth, the agency said.
The agency estimated that the returns on banks’ assets will rise as the costs of credit decline while the core profitability of banks remains stable.
If interest rates rise, net interest margins will rise, but it will also cause mark-to-market losses on banks’ large holdings of government securities, he said.